Consumer spending, confidence surprisingly strong

Despite the weight of higher payroll taxes and pump prices, consumer spending rose a surprisingly strong 0.3% in February from the prior month, after adjusting for inflation, the Commerce Department said Friday. That prompted a number of economists to boost their forecast sharply for personal spending and economic growth for the first quarter.

Moreover, a major indicator of consumer confidence edged up in March to its highest level since November, confounding analysts’ projections that the University of Michigan survey would slip as consumers also took in the news of the new government spending cuts under sequestration.

Taken together, these reports Friday suggest that consumers, so far anyway, are largely brushing aside the hits to their pocketbooks and the potential harm from sequestration.

In February, stronger job growth as well as bigger dividend payments lifted personal income by 1.1% from January.

Consumers also are dipping into their savings to support spending; the saving rate in February was just 2.6%, little changed from January but down from an average of about 4% in the previous six months.

With consumer spending accounting for about 70% of American economic activity, the latest news means that gross domestic product, the total goods and services produced in the U.S., is likely to be stronger than previously thought. After Friday’s report, Capital Economics bumped up its first-quarter GDP growth projection to an annualized rate of 3% from 2%. Macroeconomic Advisers raised its forecast to a robust 3.5% from 3.2%.

“Overall, a very encouraging report,” said Capital Economics’ chief U.S. economist, Paul Ashworth.

That said, some analysts doubt that consumer spending can continue at such a solid rate, given the effects of the fiscal spending cuts, which are expected to bring government furloughs and other cutbacks that will spill into the rest of the economy.

“We would caution that such a pace is unlikely to persist, and consumption growth in particular may cool off somewhat” in the second quarter, said analyst Cooper Howes at Barclays Bank.

Chris Rupkey of the Bank of Tokyo-Mitsubishi in New York said the economy now has momentum and strength. He added: “It will need it as the mandatory federal spending cuts will take something off growth as the year progresses.”